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Facts
The Revenue filed an appeal against the CIT(A)'s order allowing a deduction of Rs. 6,18,57,845/- claimed by the assessee, a cooperative society, as interest earned from investments. The Assessing Officer had disallowed this deduction.
Held
The Tribunal held that the assessee society, by providing credit facilities to its members and nominal members, is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, respectfully following various judicial precedents, including Supreme Court rulings.
Key Issues
Whether interest income earned by a cooperative society from its investments in banks is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, despite the investments being made from surplus funds.
Sections Cited
250, 56, 80P, 80P(2)(a)(i), 80P(4), 80P(2)(d)
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Income Tax Appellate Tribunal, PUNE BENCHES “B” :: PUNE
Before: DR.DIPAK P. RIPOTE & SHRI VINAY BHAMORE
Assessment Year: 2017-18 The Income Tax Officer, V Tata Motors Karmachari Ward-8(3), Pune. s. Sahakari Patpedhi, H 5 3rd Floor, C/o.Tata Motors, Pune City, Pune – 411018. PAN: AABAT7682B Appellant/ Revenue Respondent / Assessee Assessee by Shri Sanket Joshi – AR Revenue by Shri Abhinay Kumbhar – CIT(DR) Date of hearing 06/05/2025 Date of pronouncement 08/05/2025 आदेश/ ORDER
PER DR. DIPAK P. RIPOTE, AM:
This is an appeal filed by the Revenue against the order of ld.Commssioner of Income Tax(Appeal)[NFAC] passed under section 250 of the Act, dated 04.10.2024 for the A.Y.2017-18. The Revenue has raised the following grounds of appeal :
1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance made by the Assessing Officer of the deduction of Rs. 6,18,57,845/- claimed under section BOP of the Income-tax Act, 1961 being interest earned from the investments Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd Vs. ITO. (SC) (322 ITR 203) (2010) wherein the Hon'ble Court clearly held that the interest income which has been earned by a co-operative society by investing surplus funds would come in the category of 'Income from other sources taxable u/s 56 of the Act and would not qualify for deduction as business income u/s 80P(2)(a) (i) of the Act.
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in granting relief to the assessee Co-operative society without appreciating the facts that the above interest income does not satisfy the ingredients of mutuality having been earned by commercial activities carried out by the assessee with the non-member Co-operative banks and hence, such interest income needs to be charged as income from other sources under section 56 of the Income Tax Act, 1961.
3. On the facts and circumstances of the case and in law, the learned CIT(A) failed to appreciate the fact that the entire deposits accepted from the members was a facility to the members, instead they were put into the cooperative bank as deposits to earn interest, the income of which cannot be considered to be attributable to the business of providing credit facility to its members.
4. On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that interest earned by the assessee on its surplus investments with co-operative banks is eligible for deduction u/s.80P(2) (d) of the Income Tax Act 1961 despite the fact that the provisions of Sec 80P(4) of the Act specifically provides that the provisions of Sec.80P shall not apply in relation to a cooperative bank and therefore, the benefit of deduction under the said provisions could not have been extended to interest received on deposits kept such cooperative banks.
5. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not giving due consideration to the decision of the Hon'ble Karnataka High Court in the case of Pr. Commissioner of Income Tax vs. Totagars Cooperative Sale Society (2017). (395 ITR 611 Kar 2017), wherein, based on the decision of the Hon'ble Apex Court in the case of Totgars Co-operative Sales Society Ltd. Vs. ITO, (SCC) (322 ITR 283) (2010), it was held that a co-operative society would not be eligible for deduction u/s 80P(2)(d) on the interest income earned by it on account of deposit of its surplus funds in a co-operative bank.
6. The appellant craves leave to add to, amend, alter any of the above grounds of appeal.”
Submission of ld.AR : 2. The ld.Authorised Representative(ld.AR) of the assessee filed a paper book. The ld.AR submitted that assessee is registered under Maharashtra Co-op Societies Act, 1960 on 09/11/1995. The Assessing Officer(AO) in the assessment order has denied assessee’s claim of deduction u/sec.80P(2)(a) of the Act on the ground that assessee has nominal members and assessee has given loan to nominal members. Assessee has received interest on the loan to nominal members. Therefore, the AO held that assessee has violated provisions of Maharashtra Co-operative Societies Act. However, ld.AO has erred as assessee has not violated any provision of the Maharashtra Co-operative Societies Act. The Maharashtra Co-operative Societies Act does not prohibit accepting deposits from nominal members, therefore, AO has erred. 2.1 The ld.AR for the Assessee relied on the following case laws: Nashik Road Nagari Sahakari Patsanstha Ltd. (B Bench) Pune 93 ITR (Trib.) 44 Pune Mavilaavi Service Co-operative Bank Ltd. 431 ITR 161 (SC) Sarvodav Gramin Bigarsheti Sahakari Patsanstha Maryadit & Others Jalgaon District Central Co-operative Bank Ltd. Jankalyan Nagari Sahakari Patsanstha Maryadit 24 Taxmann.com 127 Pune Nivrutiseth Gramin Bigarsheti Sahakari Patsanstha Maryadit dated 15/03/2022. Nirmiti Nagari Sahakari Patsanstha Maryadit dated 26/10/2022 Ratnadeep Sahakari Nagari Patsanstha Maryadit ITA 388/PUN/2022 dated 26/10/2022. Submission of ld.DR : 3. The ld.Departmental Representative(ld.DR) for the Revenue vehemently supported the assessment order. Findings & Analysis : 4. We have heard both the parties and perused the records. In this case, Assessee had filed Return of Income for A.Y.2017-18 on 03.10.2017. Assessee had claimed Deduction u/s.80P of the Act of Rs.6,18,57,845/- in the Return of Income. The Assessing Officer noted that Assessee has given Loans to Nominal Members also. Assessee has earned Interest Income as under: Bank Interest (Amt. Rs.) PDCC NRF Fds 1,64,43,193/- FDs with PDCC Bank 27,77,860/- FDs with Cosmos Bank 1,74,59,695/- FFD A/c cosmos Bank 55,149/- FDs with TJSP Bank 29,16,984/- FDs with Janata Sahakari Bank 50,51,713/- Saving Int Cosmos Bank 313/- FDs with NKGSB Bank 14,53,257/- Dividend on PDCC Bank shares 10,66,956/- 4,72,25,120/- 4.1 The Assessing Officer(AO) disallowed the entire claim of 80P of the Assessee. Assessee filed appeal before the ld.CIT(A).Ld.CIT(A) allowed the assessee’s appeal following ITAT Pune’s decision in Assessee’s own case for A.Y.2012-13 in ITA No.2596/PUN/2016. 4.2 Aggrieved by the order of the ld.CIT(A), Revenue filed appeal before this Tribunal. 4.3 Ld.DR has not brought on record any contrary decision. 4.4 In the Return of Income assessee had claimed deduction u/sec.80P(2)(a) of the Act. Assessee is registered under Maharashtra Co-operative Societies Act, 1960. It is engaged in providing credit facilities to its members. On perusal of the assessment order, it is observed that Assessing Officer has denied assessee’s claim of deduction u/sec.80P(2)(a) of the Act, only on one ground that assessee was having nominal members and assessee has accepted fixed deposits from nominal members. Therefore, AO held that as per section 80P(2)(a), profits and gains of business attributable to the activity of providing credit facility to members 5 [R] only is allowed, whereas in this case, assessee has received interest from nominal members.
In this case, it is an admitted fact that there are nominal members. Section 19 of the Maharashtra Co-operative Societies Act is reproduced as under : “(19) (a) “member” means a person joining in an application for the registration of a Co-operative society which is subsequently registered, or a person duly admitted to membership of a society after registration and includes a nominal, associate or sympathizer member;” 5.1 Thus, as per Maharashtra Co-operative Societies Act, the members include nominal members. We have perused the by-laws of the assessee’s society which have been filed in the paper book and observe that there is provision of nominal members in the by- laws. Therefore, combined reading of Maharashtra Co-operative Societies Act, read with by-laws of the assessee society, the assessee society is entitled for admission of nominal members. Therefore, there is no violation of Maharashtra Co-operative Societies Act as held by Assessing Officer. 5.2 Section 43 of Maharashtra Co-operative Societies Act is reproduced as under : “43. Restrictions on borrowings.— (1) A society shall receive deposits and loans from members and other persons, only to such extent and [R] under such conditions, as may be prescribed, or specified by the bye- laws of the society.” 5.3 Thus, Maharashtra Co-operative Societies Act permits society to receive deposits from members and other persons. It means there is no bar to receive deposits from nominal members. Hence, assessee has not violated Maharashtra Co-operative Societies Actby accepting deposits from nominal members. We are aware that there has been an amendment in 2019, however, said amendment does not affect the deposits from nominal members. The amended section is as under : “24. (1) Notwithstanding anything contained in section 22, a society may admit any person as a 4[nominal or associate member]. (2) A nominal member 5* * shall not be entitled to any share in any form whatsover in the profits or assets of the society as such member. A nominal 5* * member shall ordinarily not have any of the privileges and rights of a member, but such a member, or an associate member, may, subject to the provisions of sub-section (8) of section 27, have such privileges and rights and be subject to such liabilities, of a member, as may be specified in the bylaws of the society.” 5.4 Thus, assessee has not violated provisions of Maharashtra Co- operative Societies Act by admitting nominal members, therefore, AO has erred in rejecting assessee’s claim of deduction u/sec.80P(2)(a) of the Act on the ground that assessee has violated provisions of Maharashtra Co-operative Societies Act and hence assessee’s income is not attributable to the activity of providing credit facility to its members. It is observed that assessee provided [R] credit facility exclusively to its members & nominal members. Also, as per Maharashtra Co-operative Societies Act, members include nominal members. 5.5 The Hon’ble Supreme Court in the case of Mavilayi Service Co-operative Bank Ltd. Vs. Commissioner of Income Tax, Calicut 431 ITR 1 (SC) dated 12.01.2021 held as under : “21. An analysis of this judgment would show that the question of law that was reflected in paragraph 5 of the judgment was answered in favour of the assessee. The following propositions may be culled out from the judgment:(I) That section 80P of the IT Act is a benevolent provision, which was enacted by Parliament in order to encourage and promote the growth of the co-operative sector generally in the economic life of the country and must, therefore, be read liberally and in favour of the assessee;(II) That once the assessee is entitled to avail of deduction, the entire amount of profits and gains of business that are attributable to any one or more activities mentioned in sub-section (2) of section80P must be given by way of deduction;(III) That this Court in Kerala State Cooperative Marketing Federation Ltd. (supra) has construed section 80P widely and liberally, holding that if a society were to avail of several heads of deduction, and if it fell within any one head of deduction, it would be free from tax notwithstanding that the conditions of another head of deduction are not satisfied;(IV) This is for the reason that when the legislature wanted to restrict the deduction to a particular type of co-operative society, such as is evident from section 80P(2)(b) qua milk co-operative societies, the legislature expressly says so - which is not the case with section 80P(2)(a)(i);(V) That section 80P(4) is in the nature of a proviso to the main provision contained in section 80P(1)and (2). This proviso specifically excludes only co-operative banks, which are cooperative societies who must possess a licence from the RBI to do banking business. Given the fact that the assessee in that case was not so licenced, the assessee would not fall within the mischief of section 80P(4). ……….. “We now turn to the proper interpretation of section 80P of the Income- tax Act. Firstly, the marginal note to section 80P which reads "Deduction in respect of income of co-operative societies" is important, in that it indicates the general "drift" of the provision. This was so held Court in K.P. Varghese v. ITO [1981] 7 Taxman 13/131 ITR 597 as follows: "9. This interpretation of sub-section (2) is strongly supported by the marginal note to Section 52 which reads "Consideration for transfer in cases of understatement". It is undoubtedly true that the marginal note to a section cannot be referred to for the purpose of construing the section but it can certainly be relied upon as indicating the drift of the section or, to use the words of Collins, M.R. in Bushel v. Hammond [1904] 2 KB 563 to show what the section is dealing with. It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section(vide Bengal Immunity Company Limited v. State of Bihar [1955] 2 SCR 603])."
Secondly, for purposes of eligibility for deduction, the assessee must be a "co-operative society". A co-operative society is defined in Section 2(19) of the IT Act, as being a co-operative society registered either under the Co-operative Societies Act, 1912 or under any other law for the time being in force in any State for the registration of co-operative societies. This, therefore, refers only to the factum of a co-operative society being registered under the 1912 Act or under the State law. For purposes of eligibility, it is unnecessary to probe any further as to whether the co-operative society is classified as X or Y.
Thirdly, the gross total income must include income that is referred to in sub-section (2).
Fourthly, sub-clause (2)(a)(i) with which we are directly concerned, then speaks of a co-operative society being "engaged in" carrying on the business of banking or providing credit facilities to its members. What is important qua sub-clause (2)(a)(i) is the fact that the co- operative society must be "engaged in" the providing credit facilities to its members. …………………… “Once it is clear that the co-operative society in question is providing credit facilities to its members, the fact that it is providing credit facilities to non-members does not disentitle the society in question from availing of the deduction. The distinction between eligibility for deduction and attributability of amount of profits and gains to an activity is a real one.”
5.6 Thus, applying the law laid down by the Hon’ble Supreme Court (supra) to the present case, it is observed that assessee is a Co- operative Credit Society, registered under Maharashtra Co-operative Societies Act, 1960. The assessee has provided credit facilities to its members & nominal members. Assessee has claimed profit earned from providing credit facility to its members & nominal members, exempt u/sec.80P(2)(a)(i) of the Act. As per Maharashtra Co- operative Societies Act, members include nominal members. Thus, all the conditions are fulfilled by assessee. Therefore, respectfully following the Hon’ble Supreme Court (supra), we hold that assessee is eligible for deduction u/sec.80P(2)(a)(i) of the Act.
The Hon’ble High Court of Andhra Pradesh and Telangana in the case of Vavveru Co-operative Rural Bank Ltd. [2017] 396 ITR 371 analysed the provisions of Section 80P, succinctly distinguished the decision of Hon’ble Supreme Court in the case of Totagars Cooperative Sale Society, and held as under : Quote,“8. Therefore, the real controversy arising in these writ petitions is as to whether the income derived by the petitioners by way of interest on the fixed deposits made by them with the banks, is to be treated as profits and gains of business attributable to any one of the activities indicated in sub-clauses (i) to (vii) of clause (a) of sub-section (2) of section 80P or not.
While the petitioners place strong reliance upon a decision of the Division Bench of this court in CIT v. Andhra Pradesh State Co- Bank Ltd. [2011] 12 taxmann.com 66/200 Taxman 200/336 ITR 516, the Revenue places strong reliance upon the decision of the Supreme Court in Totgar's Co-operative Sale Society Ltd. v. ITO [2010] 188 Taxman 282/322 ITR 283. …………………… 34. The case before the Supreme Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) was in respect of a co-operative credit society, which was also marketing the agricultural produce of its members. As seen from the facts disclosed in the decision of the Karnataka High Court in Totgars, from out of which the decision of the Supreme Court arose, the assessee was carrying on the business of marketing agricultural produce of the members of the society. It is also found from paragraph-3 of the decision of the Karnataka High Court in Totgar's Co-operative Sale Society Ltd.'s case (supra) that the business activity other than marketing of the agricultural produce actually resulted in net loss to the society. Therefore, it appears that the assessee in Totgars was carrying on some of the activities listed in clause (a) along with other activities. This is perhaps the reason that the assessee did not pay to its members the proceeds of the sale of their produce, but invested the same in banks. As a consequence, the investments were shown as liabilities, as they represented the money belonging to the members. The income derived from the investments made by retaining the monies belonging to the members cannot certainly be termed as profits and gains of business. This is why Totgar's struck a different note.
But, as rightly contended by the learned senior counsel for the petitioners, the investment made by the petitioners in fixed deposits in nationalised banks, were of their own monies. If the petitioners had invested those amounts in fixed deposits in other co-operative societies or in the construction of godowns and warehouses, the respondents would have granted the benefit of deduction under clause (d) or (e), as the case may be.
The original source of the investments made by the petitioners in nationalised banks is admittedly the income that the petitioners derived from the activities listed in sub-clauses (i) to (vii) of clause (a). The character of such income may not be lost, especially when the statute uses the expression "attributable to" and not any one of the two expressions, namely, "derived from" or "directly attributable to".
Therefore, we are of the considered view that the petitioners are entitled to succeed. Hence, the writ petitions are allowed, and the order of the Assessing Officer, in so far as it relates to treating the interest 80P(2)(a), is set aside.” Unquote. 6.1 Thus, the Hon’ble High Court of AP & TS held that Interest Income earned by investing Income derived from Business and Profession of providing credit facilities by a Co-Operative Society was eligible for deduction u/sec.80P(2)(a) of the Act. 6.2 No contrary decision of the Hon’ble jurisdictional High Court has been brought to our notice. Therefore, as per rule of precedence, the proposition of law laid down by the Hon’ble High Court of AP & TS (supra) are binding precedents for us. 6.3 The Hon’ble ITAT Pune Bench in the case of Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd. Vs. Income-tax Officer 158 taxmann.com 322 (Pune Tribunal) has held as under : Quote “7………………………..I am of the considered opinion that even the interest income earned by cooperative society on deposits made out of surplus funds with cooperative banks as well as schedule bank qualifies for deduction both under the provisions of section 80P(2)(a)(i) and section 80P(2)(d) of the Act, therefore, the reasoning given by the lower authorities on this issue cannot be accepted. Therefore, I direct the Assessing Officer to allow deduction u/s 80P(2)(a)(i) and 80P(2)(d) in respect of interest income earned from cooperative bank/scheduled bank. Thus, the ground of appeal
filed by the assessee stands allowed.”Unquote
7. The Hon’ble ITAT Pune Bench in the case of Yashwant Nagari Sahakari Patsanstha Maryadit Vs. ITO in dated 04.06.2024 held that the assessee was eligible for deduction u/sec.80P(2)(a) of the Act on the Interest earned by assessee. 7.1 The Hon’ble ITAT Pune Bench in the case of Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd. Vs. Income-tax Officer 158 taxmann.com 322 (Pune Tribunal) has held as under : Quote “7………………………..I am of the considered opinion that even the interest income earned by cooperative society on deposits made out of surplus funds with cooperative banks as well as schedule bank qualifies for deduction both under the provisions of section 80P(2)(a)(i) and section 80P(2)(d) of the Act, therefore, the reasoning given by the lower authorities on this issue cannot be accepted. Therefore, I direct the Assessing Officer to allow deduction u/s 80P(2)(a)(i) and 80P(2)(d) in respect of interest income earned from cooperative bank/scheduled bank. Thus, the ground of appeal filed by the assessee stands allowed.”Unquote 7.2 The Hon’ble ITAT Pune Bench in the case of Yashwant Nagari Sahakari Patsanstha Maryadit Vs. ITO in dated 04.06.2024 held that the assessee was eligible for deduction u/sec.80P(2)(a) of the Act on the Interest earned by assessee.